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This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along with Lisa Bromwitz and Amerie Hordern. Join us each day for insight from the best in markets, economics, and geopolitics from our global headquarters in New York City. We are live on Bloomberg Television weekday mornings from six to nine am Eastern. Subscribe to the podcast on Apple, Spotify or anywhere else you listen, and as always on the Bloomberg
Terminal and the Bloomberg Business App. Ohmar Aguila schwarmasset Management CEO and CIO writing. Economic uncertainty is still high, So think long term, stay disciplined, stay invested, and stay diversified. No need to be a hero. Omar joins us now for more. Omar, Welcome to the program, sir. Let's talk about that economic uncertainty. How are you getting a clean read on the economy in America?
Well, you know the big part of of the trade offs right now between inflation, unemployment, economic deceleration and overall, you know, the path that we're seem to be going here, it is unclear how the consumers are actually driving you know, the majority of economic growth we have seen so far this case shape economy, where the top end of earners continue to drive GDP growth, and the wealth affact coming from equity markets, coming from housing, coming from anything else
seem to be very consistently supporting economic growth, where the other part of the economy, the ower income consumers, seems to be you know, suffering from you know, the pressures on inflation, the increasing prices. So that sort of case shape economy seems to be the one driving a lot of these economic concernity and the trend seems to pointing out towards deceleration.
No need to be a hero. I keep thinking about that. The implication is focus on quality. As you say, what does quality mean? How is the idea of quality changing given the backdrop potentially of inflation, the backdrop given of slow growth with this sort of persistent price pressure.
Yeah, the big part here, Lisa, is that we have these forces that are sort of going at each other. You know, inflation seems to be very sticky and stubborn. We see in the economic value and the unemployment being in these no higher, no fire situation. We see wage growth still ticking up a little bit putting pressure on inflation and something at some point is probably have to
give up. What that means is that in certain way that deceleration supports stronger balance sheets, supports discipline in management, supports capital expenditures, supports areas that define the quality of a company. Where Corporate America is using all the potential tailwinds coming from the economy to be able to manage their business in a way that is consistent with what the consumers expect, but at the same time have the potential for a sustainable and that's the definition of quality,
sustainable earnings growth. When you put that into context, that's what we refers to say, look for those companies that allows you to stay invested, that continues to have strengthened the balance sheets, and that will be stronger even if the economy decelerates. So that's a big part of what we have on both on fixed income as well as on equities.
Can you find more quality, more reliability in corporations versus governments right now?
You know, corporations have been very disciplined over the entire period since the pandemic, and if you actually look at a big part of the driver, you can see it
in the credit market. The credit spreads have been incredibly tight, and most importantly, not only the level, but if you actually see the level of volatility of the credit market, is actually very surprising to just see that, even though we have seen all kinds of uncertainty coming from headlines and everything else, we see this incredibly you know, well
positioned for for quiet quality companies. What leverage has not been high, you know, obvious lead their companies that have done it and that have been in the process of potentially you know, disappointing in terms of their future, but overall that quality is being very faired in credit. When you think about governments, deficits have ballooned, and you actually see what's going on in the UK, what's going on
in the United States. You know clearly you know, a little a little bit of that defense expending as well as capital expenditures that has been positive for the economy. It obviously puts a little bit more pressure on the long part of the fixed income curve. You can actually see just that level of volatility and that we see in the in the long end of the of the of the Yale curve.
This is why it's so challenging when you look at what the Supreme Court has in front of them. This could actually impact potentially what bonds do, given the fact that trillions of dollars coming to United States from terrorists is supposed to be depleting the deficit. Omar, if we were to see the Supreme Court strike down what is going on with AIPA and the President United States, what would that mean for the bond market.
Well, first of all, the things that are actually very clear. The trend for the Yeald curve is too steeper. I think we are convinced, you know, in our research that you know, overall, the uncertainty and the long end long end of the yeal curve you know, will continue. We see that even just in the last twenty four hours where we see volatility on the third year you know yield on bonds you know, being you know, quite dramatic.
A lot of that is because a inflation expectations, but two it's also you know, what will be the long term you know views in terms of the deficit regarding you know, to the setup that may happen within certain entireists.
It's kind of interesting to see that uncertainty tireiffs you know, started by affecting sort of the short part of the Yeald curve and now has been pushed towards towards the long end of the curve precisely for what would you just describe which is a big part of why, you know, the the the middle of the curve seems to be the one that has been the most stable, and even with the yield curve you know, starts to steepend, you can actually still see some stability in that area.
Stay with US multil Index savanas coming up off to this, joining us Nasmonic Aguerra of Molch and Stanley to discuss some of this Just how much deficit risk is in play with this core decision.
A significant amount. You know, the OBVA added four point five trillion to the to the deficit and the last you know estimate that they gave when they modeled things out. When we're thinking about this revenue, we're looking at about you know, twenty billion plus a month. That's a huge shift. It was five billion prior monthly. So again there's a lot at risk here when you're looking at that two to three trillion dollars range of revenue that they're expecting.
That's enough to really offset a lot of those budget hawk concerns right especially around the deficit.
And this is one reason why Marcus haven't freaked out at some of the budget deficit concerns. There is a question of why there hasn't been more of a response in the long end of the yield curve to this court ruling. And some people argue, well, that revenue will keep coming in regardless one way or another. Do you agree with that.
Yeah, So it's our base case that even if the Supreme Court does rule against Trump, that, you know, if there's a will, there's a way, And we've seen that not just through them exploring other options of loving tariffs through different federal agencies, but also through different you know, sections of tarifflaw. You know section two thirty two, Section three oh one. There's a ton there's a whole list.
We recently published a report where we really get into the details on each one, the timeframes, how it works, and while some are limited, they can layer these and there are some that are more long term. So there are options out there, and I think that markets understand that and that they're trying to look through any volatility around the Supreme Court.
Direction of travel is clear they're going to find a way to increased tariffs even if the Supreme Court does strike this down. But do you think the Supreme Court is that your base case? Will they uphold di Bote they strike it down.
I'm not the expert on the Supreme Court, but what I can say is I think that there is a strong likelihood that they will rule in favor of the President, and then if not, right, it's just how do we get there? And we also have to remember that right now, the terriffs are still in place, so it's not like they've completely rolled off. We're still collecting revenues right as
we go along. And even if we do end up with a patchwork and say you get ten billion a month, that's still double what we were receiving before, and that is a help towards that deficit.
How messy is that unwind going to be?
Though?
If they were half, if they were going to have to potentially give back some of those funds, I mean, it would be it would be messy.
You know, if you're thinking about even negotiations with the EU. You know they're trying to proceed proceed as you know, business as usual, but they're being very cognizant that some of these things may have to be unwound if things
are unstable. Now, what's interesting is that when other foreign entities have been asked in the recent days, you know, how are you approaching this, they're still continuing negotiations as if things are in play, and so we have to, you know, keep that in mind that there's a strong belief that tariffs are coming one way or the other.
So this sounds very technical, but I have been getting a little bit overly technical recently. The stay from the court only goes to October fourteenth. To keep these tariffs on, the Supreme Court has to decide to take this up and then rule on it, and that stay expires. What happens then, I mean, can't companies go to the government and say, can you give me my money back because I paid you a couple of billion dollars.
It's unclear to me if that's retroactive, right, so if you're already paying you know, I'm not sure about the logistics there. I doubt it is. I'm sure the money that the government has collected will stay in the treasury where it's safe and sound. I would say the biggest concern for us from a markets lens, right, is that if there's more polatility here, especially for businesses come October, you know, are people going to hold cash on the sidelines? Are they going to continue to wait on say, cap
box expenditures. What is the longer term economic impact right from that VOLATILITYA.
Stay with us. More Bloomberg surveillance coming up after this. Let's turn to the economy and to retailers may see surging twenty percent in Wednesday's trading following an up be forecast on the consumer. The retail team at Goldman Sex writing quote, where there continues to be concerns around spending behavior, we remain cautiously optimistic going into twenty twenty six. Joining us now from the Goldman sax Global Retailing Conference is
Goldman's leader Peril analyst Brooke roach Brook. Welcome to the program. Let's just talk about this. So the retailers are talking up a better story. The economic data is not so great at the moment. What's the call from you and the team?
Good morning and thank you. It's great to be with you this morning from the Goldman Sachs Global Retailing Conference. This is our thirty second annual conference and we're with nearly eighty companies talking about strategy and what's happening in the state of retail. Bottom line is that the consumer remains resilient.
This is what we're hearing from a lot of different companies, And yesterday I was there and I was speaking with one CEO who said, it's sort of like a flat surface, a hard surface.
Under the hood.
There's a lot going on and a lot of molecules that are kind of battling each other, but it all comes together to kind of a flat surface. What are people looking at that could potentially break it to the upside the sort of stealthy bull case that we keep hearing about.
That's a very good question. I think overall, as we put together all of the various inputs of what might be driving consumer discretionary demand on a go forward basis, we see a better outlook into twenty twenty six, with discretionary cash flow modestly stronger across income quintiles, and with some real opportunities for consumers to engage with great product
and great retailers. What we're seeing overall is that trends have been better throughout the back to school season, and this strong back to school season start is real is much better than expected, and I think there is a view from many retailers that there is some cautious optimism
that hopefully this will continue. But I think retailers are very cognizant that there is a tougher com be head and that there is some uncertainty on what the pricing backdrop might mean and what that might mean for consumer engagement. From a demand perspective, the good news is that we haven't yet seen price less to see of demand and back to school has been strong, so what could break it?
I think there's a lot of questions on what could be the case for consumers in terms of their mood or what might be happening, But we believe that the outlook is fairly robust.
What you just said there is actually really important, the idea that a lot of these retailers are increasing prices and people are still buying. In other words, they say have the power to increase prices and it's not destructing demand, and you're seeing that pretty much across the board. They're
able to raise prices in select ways. Do they have a sense of whether this is coming from wealthy individuals, whether this is coming particularly from more luxury sectors, or whether this is across the board through all the tiers of different income levels.
I think at this point retailers are trying to do their best to protect the consumer and to protect their businesses,
but they are seeing some cost increases overall. At this juncture, we've only seen modest price increases across the board based on what retailers are telling us, but there is some question about what that price might look like into the back half of the year as we think about that the change so far, given that it has been modest and it hasn't been broad based across the board as far as what retailers are saying right now, consumers have
been able to absorb these price increases. They do have higher discretionary cash flow in they do have a stronger wallet right now, and so far, it does appear that many retailers are looking to try it to do it in a way that won't hurt the consumer, whether that is a mixshift into different types of products or categories, or otherwise.
Broke before you go. Can we lend some thoughts to the idea that maybe the C suite I think is struggling with this cultural moment in America as well. I'd love your thoughts on this, And while you're hearing from management teams, I'm thinking more recently of Cracker Barrel almost blowing its south up American Eagle leaning into controversy and it benefits them. The stock is up nice in the pre market so far this morning. What's your understanding of how the C suite is wrestling with this moment?
You know, I don't know about your specific examples that you gave, but what I would say is that retailers are focused on engaging with their core consumer. They're investing more in marketing, They're looking to try and create better products that will drive strong consumer demand, regardless of what the macro backdrop looks like. And we're seeing more and more retailers lean into that. And we heard that a lot yesterday with various about marketing, consumer engagement, and great new product.
Stay with us more Bloomberg Surveillance coming up after this. Sibant is Chaffer of self Gen remaining slightly cautious, writing this, well, the hope is for lower policy rates to stimulate the mortgage market. That could bag fire. We could see a repeat of last September when a fifty basis point rate cut resulted in higher long end yields. Sibantra joins us
now for more savantric go morning, Good morning. Going to pick up on the line of questioning that we finished the last interview, Is this federal reserve cutting into strength?
It feels like it because if you look at a lot of the data that's come in, economic surprises have been to the positive side. You know, the growth momentum into the second quarter is also on the positive side. Inflation is high and sticky, the job market is Mike McKee was pointing out there's no hirings, there's no firings. It's in a state of stasis. So to me, it feels like that, plus all of the fiscal stimulus that could potentially come down the pike could be something that
could move the markets higher. So it feels to me like some of these cuts that are priced into the market are more preemptive than really something that's warranted.
Is this something that's tradable now or is this a sort of warning shot ahead of what could be a tumultuous couple of months.
I think so.
I mean, the market's pricing in nearly six cuts between now and the end of next year. The markets, you know, people are looking at a cut and maybe three cuts this year. To me, it feels like if they cut sooner and more aggressively, they won't be able to cut as much next year. So the neutral rate is going to have to be a lot higher given the fact that inflation is still high and stick into the risk is that you could see a reacceleration of inflationary pressure.
So the market to me feels like it's overpricing cuts between now and the end of.
Next year, even with the political impetus, right, I mean, how do you sort of overlay any kind of political interference with this given that right now this is a FED that has a dubbish bias and may have an even more dubbish bias by the time we get around to twenty twenty six.
So that's the part that's stricty, and I think that that's part of the reason why the market's pricing in six cuts by the end of next year. So the market's really looking at what the FED could do as opposed to what the FED should do. So to me, it's very hard to really kind of separate the two aspects. One is, if you have a very dubbish committee next year that could really change the dynamics in the market. But over the long run, that to me leads to
FED credibility. A lot of times we look at the market and say that, you know, the bond market is very complacent right now. Volatility is very very low, but you could see a pretty significant set off in bonds. Vonnie is in a very short amount of time if there is a crisis of confidence, but.
There isn't right now. How much are you going to be watching this Stephen Myern Senate confirmation hearing just to really, as Terry Haynes put it, read the body language of the Senate, which, at the end of the day, the purview of the Fed does belong to Congress.
Yeah, I mean it is important. We will be paying attention to what's he's saying, but it's really a committee this decision as of now. It really depends on what the composition of the committee is going to be next year, who President Trump nominates to be the next FED chair. So again there's a lot of uncertainty, but there's a lot of complacency I think in the bond markets. You know, just going back into the last say, you know, a few years, we've seen many episodes when when bond years
arisen sharply. We saw, you know, one hundred hundred and fifty basis points of bonniears rise after you know, August of twenty twenty three, when you know the treasury issuance, you know, coup punishment size has changed. We saw a pretty decent sell off in bonds even last year when the FED
cut rates by fifty basis points. So, you know, to me, it feels like there is just that feeling that everything is going to be status quo when there's just a lot of uncertainty coming down the pike, whether it be FED independence, whether it be the trajectory for debt and deficits not just in the US but also globally and other kind of you know, extreme age factors like terrots and that. Working through the legal system, I think you.
Build an incredible case. But what's been surprising for me is just how stable the treasury market actually has been. Yes, we've had stepning in America like we've had stepening in Europe, but this step ning has been completely different. It's been led by the front end. Tens and thirties have been really resilient, really resilient relative to some of the chaos in France, some of the chaos in the UK. What's supporting the treasury market right now? Maybe that's an interesting
question to ask, what is supporting this? What is keeping tens at four to twenty thirties away from five percent?
So I think that when you look at the composition of where people can invest, I mean, clearly the front end is speG defed expectations and market is pricing in as I said, a lot of cuts over the next year, in year and a half, and then when that trades matched out, investors kind of move on to the belly of the curve. And the belly is really where you've seen a lot of the flows. I mean, the two
S five curve actually inverted a few times. You're seeing a lot of demand for the five and tenure part of the yell curve, and investors broad is speaking a concern about putting money beyond that tenure sector because there's a lot of volatility in the very long end, not just from the debt and deficit trajectory for the US, but also what's happening globally. You're looking at, you know, the picture in Japan or you know the political you know,
unrest in France. That all argues for longer, higher long end yields. So really the the center of gravity for the treasure market seems to be the value of the curve.
So last year they dropped raised one hundred basis points. It was a rose of the long end by one hundred basis points. What are you actually looking for its a year end? What kind of number.
You know? The To me, it feels like the tenure yield is still going to stay between four and four and a half percent. Yes, to me, the risk is that we might actually start drifting towards four and a half percent if the market starts to get concerned about kind of the inflationary you know, impact of tariffs that feeding through, or if there's any sort of concern over fed credibility. But you know, the different sectors of the yelcre are still going to remain ranged by where. I'm
really concerned about years getting unhinged. Just in the very long end. I think thirty eight yelds could very easily get to four to five twenty five. I mean, we saw a lot of volatility in just this week in the thirty year, so it's very conceivable that you start seeing, you know, that sort of you know, concern play out in the very long end of the YEO CRE.
This is the Bloomberg Surveillance Podcast, bringing you the best in markets, economics, an gio politics. You can watch the show live on Bloomberg TV weekday mornings from six am to nine am Eastern. Subscribe to the podcast on Apple, Spotify or anywhere else you listen, and as always on the Bloomberg Terminal and the Bloomberg Business app.